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Bob- Machine design department situation

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Bob is the manager of a machine design dept in a large corporation. His engineers and designers charge their internal corporate clients on an hourly basis at $50/hr. This represents the department's average cost for an hour's labor based on full capacity. Each engineer is assumed to have 1,800 billable hours/year. The $50/hour is the sum of all the salaries and benefits divide by the product of 1,800 billable hours and the number of salaries in the numerator. The $50/hour charged to users is the same regardless of the pay, position, or skill level of the engineer or designer assigned to the job. All large jobs (those in excess of $50,000) are estimated and contracted for up front, but in the past clients had no recourse except to continue paying if estimates were exceeded. Recent competitive pressures on the entire corporation have caused many of Bob's clients to seek competitive bids from outside the firm. Bob's department has found itself sitting idle while outside design firms are awarded contracts.
Bob claims that he is being treated unfairly because he has no choice but to charge a higher price. Many times his most skilled and senior people spend their time assisting clients in establishing equipment requirements and investigating technology alternatives, only to find the bulk of the job farmed out to a small design firm that charges $30/hour once critical design and technical decisions are made. Evaluate this situation and list all the major issues as well as all possible solutions in detail.

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Solution Summary

The following posting discusses a situation in a machine design department.

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Evaluation and Solution:

There are two major issues being faced by Bob's department. The first issue is the irrational pricing structure of Bob's department in which clients are billed on a flat rate, irrespective of the skill and experience of the employee being deployed for the contract. The issue is critical in the sense that it is leading to loss of contracts for Bob's department.

In order to resolve this critical issue, Bob should chalk down a plan to rationalize the pricing structure for its internal corporate clients. This task will involve an extensive analysis of the ...

Solution provided by:
Sheetal Jain, PGDM
Education
  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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